Coase-Sandor Working Paper Series in Law and Economics
“Your money or your life” is a classic threat, and it is one that law is prepared to penalize. The sanction may occasionally do more harm than good, but for the most part the law’s treatment of such serious threats is sensible. In contrast, “If you do not lower the price of that automobile I hope to buy, I will never return to this dealership” is a threat that law ignores. The buyer is free to return the next day and reveal that the threat was a bluff. In both cases the threat is a more valuable signal if the listener can weed out bluffs. This Article suggests that there is a good case to be made for legal intervention on behalf of some commercial threats, in order to enhance their credibility and signaling value. Third-party effects do, however, complicate the analysis. We suggest that the best remedy in support of valuable threats is to put the nonthreatening party at risk in the event that it enters into an arrangement that the threat-maker previously forswore. The analysis develops the ingredients for credibility in commercial, criminal, and international contexts, including the cost of executing a threat, the role of repeat play, and the calculus of what we call secondary credibility – the likelihood that a threat will be carried out even though the target complies and the danger that capitulation will bring about another threat. It then turns to situations in which a threat-maker can enhance credibility by proceeding in stages. A threat is often more credible if its execution has begun, so that the marginal cost of completion is modest, and lower than the direct benefit expected from the target’s compliance. The discussion shows that law itself, where designed to discourage threats and their execution, can perversely contribute to threat-making by constituting just such a sunk cost, or first stage of a multi-stage process.
Saul Levmore & Ariel Porat, "Credible Threats" (Coase-Sandor Institute for Law & Economics Working Paper No. 692, 2014) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2466617..